Why you need to know the difference
The method by which a worker is engaged can have several legal ramifications. The terms of engagement impacts the type of obligations owed to the worker (such as pay and conditions), as well as their entitlements in the event the worker is injured.
It is also important to ensure that any relationship with a worker is properly characterised to ensure that relevant industrial relations, superannuation and taxation obligations are met.
For instance, businesses who incorrectly treat employees as independent contractors risk significant penalties including PAYG withholding penalty and super guarantee penalties.
Further, even if a worker is found to genuinely be an independent contractor, the worker will be entitled to receive superannuation payments in accordance with the superannuation guarantee (where the worker has contracted as an individual and the contract is principally for the provision of labour).
What’s the difference?
Put simply, an employee works in a business and is part of the business. An independent contractor is, generally, running their own business. However, determining whether a worker is an employee or a contractor is not always straightforward, as every workplace is unique, and the nature of the relationship between parties will depend on their circumstances. Fortunately, the High Court has set out the following criteria which may assist in determining whether a worker is an employee or an independent contractor (Stevens v Brodribb Sawmilling Company Pty Ltd; Gray v Brodribb Sawmilling Company Pty Ltd (1986) 160 CLR 16):-
- Degree of control
The greater control exercised over the worker, the more likely the worker is to be an employee. In this regard, the test lies not so much in the actual exercise of control but the right of an employer to exercise it.
- Provision and maintenance of equipment
If a worker provides no (or minimal equipment) necessary to carry out their duties then, again, they are more likely to be an employee. However, if a worker pays significant expenses towards the provision and maintenance of equipment from the remuneration they receive, it is possible they may be an independent contractor.
- Mode of remuneration
Payment by unit (e.g. an hourly/weekly or per task/item) is associated with the position of an employee, whereas, payment in accordance with a quote (possibly including labour and materials) is associated with the role of an independent contractor. Further, deduction of income tax from any remuneration is indicative of an employment relationship.
- Hours of work and provision of paid leave
Set hours of work with paid leave entitlements (or an allowance in lieu of paid leave entitlements) suggests an employment relationship.
- Obligation to work and ability to delegate work
Where there is an expectation that a worker will attend work at a specific time, for a specific period and will carry out the work personally, this aligns with an employment relationship. Where the worker has flexibility about when they attend to the work and how (or by whom) it is carried out, the worker is more likely to be an independent contractor.
If you are still uncertain as to whether your worker is an employee or an independent contractor, please be aware that the ATO has devised a helpful tool to assist in determining whether a worker is an employee or contractor for the purposes of taxation law called the Employee/Contractor Decision Tool.
Key take away
- An employee works in a business and is part of the business. An independent contractor is, generally, running their own business.
- The degree of control, provision and maintenance of equipment, mode of remuneration, hours of work and provision of paid leave, and obligation to work and ability to delegate work, are all factors that need to be taken into account to assist in determining whether a worker is an employee or an independent contractor.
- There are significant legal ramifications for getting the classification wrong, such as PAYG withholding penalties and super guarantee penalties.
If you need legal advice regarding your specific circumstances, regarding whether the method of engagement of your worker is an employee or independent contractor, or about broader workplace issues, including workplace injury law and employment law matters, please contact our Toowoomba office on (07) 4637 6300.